February 28, 2008
More on Caremark
Posted by Brett McDonnell

In my previous post on Caremark, I argued that the court deliberately made liability highly unlikely--it was seeking to influence behavior by announcing norms of good behavior which were unlikely to be legally enforced.  This left open the question as to whether or not that is a good approach.  It seems to me that sometimes this is a good way of doing things, and Caremark is one of those times.

Why not get more serious about imposing liability?  Because failure to monitor cases don't involve structural problems where there is strong reason to suspect that directors will be unlikely to pursue the best interests of shareholders.  We should have courts more closely scrutinize director action or inaction only where their self-interest, or the interest of others who may unduly influence them, is likely to distort their motivation.  There is no particular reason to expect strong problems along those lines in the decision concerning whether and how to monitor the behavior of corporate employees for possible illegality.

Why not, then, avoid any chance of liability by placing failure to monitor cases under the duty of care, with the protection of the business judgment rule and 102(b)(7) exculpation clauses?  That's a harder question.  Claire Hill and I struggle with it, but conclude that there may be just enough of a threat of bad director motivation in these cases to give directors a whiff of potential iability and try to change norms, as Caremark does. 

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